Form of 1996 Stock Plan for Salix Pharmaceuticals



 Exhibit 10.3 
  
 SALIX PHARMACEUTICALS, LTD. 
 1996 STOCK OPTION PLAN 
 (as amended through July 1, 2004) 
  
 1. Purposes of the Plan. The purposes of this 1996 Stock Option Plan
are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to the Employees and Consultants of the Company and to promote the success of the Company’s business. Options
granted hereunder may be either Incentive Stock Options or Nonstatutory Stock Options, at the discretion of the Board and as reflected in the terms of the written option agreement. 
  
 2. Definitions. As used herein, the following definitions shall apply: 
  
 (a) “Administrator” shall mean the Board or any of its Committees
appointed pursuant to Section 4 of the Plan. 
  
 (b)
“Applicable Laws” means the requirements relating to the administration of stock option plans under the corporate laws and securities regulations of applicable U.S. state corporate laws, U.S. federal and state securities laws, the Code,
any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options are, or will be, granted under the Plan. 
  
 (c) “Associate” shall mean (i) any company of which such person or
company beneficially owns, directly or indirectly, voting securities carrying more than 10 per cent of the voting rights attached to all voting securities of the company for the time being outstanding, (ii) any partner of that person or company,
(iii) any trust or estate in which such person or company has a substantial beneficial interest or as to which such person or company serves as trustee or in a similar capacity, (iv) any relative of that person who resides in the same home as that
person, (v) any person of the opposite sex who resides in the same home as that person and to whom that person is married or with whom that person is living in a conjugal relationship outside marriage, or (vi) any relative of a person mentioned in
clause (v) who has the same home as that person. 
  
 (d)
“Board” shall mean the Board of Directors of the Company. 
  
 (e) “Change in Control” shall mean a change in control of a nature that would be required to be reported in response to item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act
as such Schedule, Regulation and Act were in effect on the date of adoption of this Plan by the Board, assuming that such Schedule, Regulation and Act applied to the Company, provided that such a change in control shall be deemed to have occurred at
such time as: 
  
 (i) any “person” (as that term is
used in Section 13(d) and 14(d)(2) of the Exchange Act) (other than the Company, a Subsidiary or an Affiliate of the Company) becomes, directly or indirectly, the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) of
securities representing a 33 1/3% or more of the combined voting power for election of members of the Board of
the then outstanding voting securities of the Company or any successor of the Company; 







 (ii) during any period of two consecutive years or less, individuals who at the beginning of such period
constituted the Board of the Company cease, for any reason, to constitute at least a majority of the Board, unless the election of nomination for election of each new member of the Board was approved by a vote of at least two-thirds of the members
of the Board then still in office who were members of the Board at the beginning of the period; 
  
 (iii) the equityholders of the Company approve any merger or consolidation to which the Company is a party as a result of which the persons who were
equityholders of the Company immediately prior to the effective date of the merger or consolidation (and excluding, however, any shares held by any party to such merger or consolidation and their affiliates) shall have beneficial ownership of less
than 50% of the combined voting power for election of members of the Board (or equivalent) of the surviving entity following the effective date of such merger or consolidation; or 
  
 (iv) the equityholders of the Company approve any merger or consolidation as a result of which the equity interests in the
Company shall be changed, converted or exchanged (other than a merger with a wholly-owned Subsidiary of the Company) or any liquidation of the Company or any sale or other disposition of all or substantially all of the assets of the Company.

  
 However, in no event shall a Change in Control be deemed to
have occurred with respect to a Optionee, if the Optionee is part of a purchasing group which consummates the Change in Control transaction. The Optionee shall be deemed “part of a purchasing group” for purposes of the preceding sentence
if the Optionee is either directly or indirectly an equity participant in the purchasing group (except for (i) passive ownership of less than 3% of the stock of the purchasing group, or (ii) ownership of equity participation in the purchasing group
which is otherwise not significant, as determined prior to the Change in Control by the Committee). 
  
 (f) “Code” shall mean the Internal Revenue Code of 1986, as amended, or any successor thereto. 
  
 (g) “Committee” shall mean any Committee appointed by the
Board of Directors in accordance with Section 4(a) of the Plan, if one is appointed. 
  
 (h) “Common Stock” shall mean the Common Stock of the Company. 
  
 (i) “Company” shall mean Salix Pharmaceuticals, Ltd., a Delaware corporation. 
  
 (j) “Consultant” shall mean any person, including an
advisor, engaged by the Company or any Parent or Subsidiary to render services to such entity, and any Director of the Company whether compensated for such services or not. 







 (k) “Continuous Status as an Employee or Consultant” shall mean the absence of any
interruption or termination of service as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of sick leave, military leave, or any other leave of absence approved by the
Administrator; provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute. For purposes of this Plan, a change in status from Employee to Consultant or
from Consultant to Employee will not constitute a termination of employment. 
  
 (l) “Director” shall mean a member of the Board. 
  
 (m) “Employee” shall mean any person, including Officers and Named Executives (including Officers and Named Executives who are also
Directors), employed by the Company or any Parent or Subsidiary of the Company. The payment of a Director’s fee by the Company shall not be sufficient to constitute “employment” by the Company. 
  
 (n) “Exchange Act” shall mean the Securities Exchange Act of
1934, as amended. 
  
 (o) “Fair Market Value”
means, as of any date, the value of Common Stock determined as follows: 
  
 (i) If the Common Stock is listed on any established stock exchange or national market system in the United States, including without limitation the National Market System of the National Association of Securities
Dealers, Inc. Automated Quotation (“NASDAQ”) System, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported, as quoted on such exchange or system for the last market trading day
prior to the time of determination) as reported in The Wall Street Journal or such other source as the Administrator deems reliable; 
  
 (ii) If the Common Stock is quoted on the NASDAQ System (but not on The National Market System thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock; or 
  
 (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board.

  
 (p) “Incentive Stock Option” shall mean an
Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. 
  
 (q) “Named Executive” shall mean any individual who, on the last day of the Company’s fiscal year, is the chief executive officer of
the Company (or is acting in such capacity) or among the four highest compensated Officers of the Company (other than the chief executive officer). Such officer status shall be determined pursuant to the executive compensation disclosure rules under
the Exchange Act. 







 (r) “Nonstatutory Stock Option” shall mean an Option not intended to qualify as an
Incentive Stock Option. 
  
 (s) “Officer” shall
mean a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder, or any successor thereto and (a) every Director or senior officer of the Company, (b) every
Director or senior officer of a company that is itself an insider or subsidiary of the Company, (c) any person or company who beneficially owns, directly or indirectly, voting securities of the Company or who exercises control or direction over
voting securities of the Company or a combination of both carrying more than 10% of the voting rights attached to all voting securities of the Company for the time being outstanding other than voting securities held by the person or company as
underwriter in the course of a distribution, and (d) the Company where it has purchased, redeemed or otherwise acquired any of its securities, for so long as it holds any of its securities; 
  
 (t) “Option” shall mean a stock option granted pursuant to
the Plan. 
  
 (u) “Optioned Stock” shall mean the
Common Stock subject to an Option. 
  
 (v)
“Optionee” shall mean an Employee or Consultant who receives an Option. 
  
 (w) “Parent” shall mean a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code. 
  
 (x) “Plan” shall mean this 1996 Stock Option Plan, as amended. 
  
 (y) “Rule 16b-3” shall mean Rule 16b-3 promulgated under the
Exchange Act as the same may be amended from time to time, or any successor provision. 
  
 (z) “Share” shall mean a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan. 
  
 (aa) “Subsidiary” shall mean a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the
Code. 
  
 3. Stock Subject to the Plan. Subject to the
provisions of Section 13 of the Plan, the maximum aggregate number of shares that may be optioned and sold under the Plan is 10,200,000. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become
unexercisable for any reason without having been exercised in full, the unpurchased Shares that were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. Notwithstanding any other
provision of the Plan, shares issued under the Plan and later repurchased by the Company shall not become available for future grant or sale under the Plan. 







 4. Administration of the Plan. 
  
 (a) Procedure. 
  
 (i) Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to different groups of
Employees and Consultants. 
  
 (i) Section
162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as “performance-based compensation” within the meaning of Section 162(m) of the Code, the Plan shall be administered by a
Committee of two or more “outside directors” within the meaning of Section 162(m) of the Code. 
  
 (ii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions
contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. 
  
 (iii) Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which
committee shall be constituted to satisfy Applicable Laws. 
  
 (b)
Powers of the Administrator. Subject to compliance with Applicable Laws, and further subject to the provisions of the Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, the Administrator shall
have the authority, in its discretion: 
  
 (i) to
determine the Fair Market Value of the Common Stock, in accordance with Section 2(o) of the Plan; 
  
 (ii) to select the Employees and Consultants to whom Options may from time to time be granted hereunder; 
  
 (iii) to determine whether and to what extent Options are
granted hereunder; 
  
 (iv) to determine the
number of shares of Common Stock to be covered by each such award granted hereunder; 
  
 (v) to approve forms of agreement for use under the Plan; 
  
 (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award
granted hereunder (including, but not limited to, the share price and any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Option and/or the shares of Common Stock relating thereto, based in
each case on such factors as the Administrator shall determine, in its sole discretion); 







 (vii) to determine whether, to what extent and under what circumstances Common Stock and
other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant (including providing for and determining the amount, if any, of any deemed earnings on any deferred amount
during any deferral period); 
  
 (viii) to
construe and interpret the terms of the Plan and awards granted pursuant to the Plan; and 
  
 (ix) to institute an option exchange program. 
  
 (c) Effect of Administrator’s Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on
all Optionees and any other holders of any Options. 
  
 5.
Eligibility. 
  
 (a) Nonstatutory Stock Options may be
granted only to Employees and Consultants. Incentive Stock Options may be granted only to Employees. An Employee or Consultant who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options.

  
 (b) Each Option shall be designated in the written option
agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of Options that are exercisable for the first time by an Optionee during any
calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. 
  

(c) For purposes of Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market
Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. 
  
 (d) The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consulting relationship with the Company, nor
shall it interfere in any way with his or her right or the Company’s right to terminate his or her employment or consulting relationship at any time, with or without cause. 
  
 (e) The terms of any Option shall comply with Applicable Laws. 
  
 6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors
or its approval by the stockholders of the Company. It shall continue in effect for a term of ten (10) years, unless sooner terminated under Section 15 of the Plan. 







 7. Term of Option. The term of each Option shall be the term stated in the Option Agreement;
provided, however, that in the case of an Incentive Stock Option, the term shall be no more than ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. However, in the case of an
Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option
shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. 
  
 8. Option Exercise Price and Consideration. 
  
 (a) The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Administrator,
but shall be no less than 100% of the Fair Market Value on the date of grant; provided, that, in the case of an Incentive Stock Option granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock
representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant.

  
 (b) The consideration to be paid for the Shares to be issued
upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (1) cash, (2) check, (3)
other Shares that (x) in the case of Shares acquired upon exercise of an Option either have been owned by the Optionee for more than six months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (y) have a
Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (4) authorization from the Company to retain from the total number of Shares as to which the Option is
exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised, (5) delivery of a properly executed exercise notice together with
irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the exercise price, (6) any combination of the foregoing methods of payment, or (7) such other consideration and method of
payment for the issuance of Shares to the extent permitted under Applicable Laws. No Optionee shall receive financial assistance from the Company in connection with the exercise of any Option and the purchase price of the Common Stock issuable
pursuant to any Option shall be paid in full prior to the issuance of such Common Stock. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably
expected to benefit the Company. 
  
 9. Exercise of Option.

  
 (a) Procedure for Exercise; Rights as a Stockholder.
Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan. 







 An Option may not be exercised for a fraction of a Share. 
  
 An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full
payment may, as authorized by the Administrator, consist of any consideration and method of payment allowable under Section 8(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is
issued, except as provided in Section 13 of the Plan. 
  
 Exercise
of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. 
  
 (b) Termination of Status as an Employee or Consultant. In the event
of termination of an Optionee’s Continuous Status as an Employee or Consultant, such Optionee may, but only within thirty (30) days (or such other period of time, not exceeding three (3) months in the case of an Incentive Stock Option or six
(6) months in the case of a Nonstatutory Stock Option, as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) after the date of such termination (but in
no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. To the extent that the
Optionee was not entitled to exercise the Option at the date of such termination, or if the optionee does not exercise such Option (which he or she was entitled to exercise) within the time specified herein, the Option shall terminate. 

 
 (c) Disability of Optionee. Notwithstanding the provisions of
Section 9(b) above, in the event of termination of an Optionee’s Continuous Status as an Employee or Consultant as a result of his or her disability, all unvested options under the Optionee’s Option shall immediately vest, and he or she
may, but only within twelve (12) months (or such other period of time not exceeding twelve (12) months as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the
Option) from the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise his or her Option. To the extent that he or she does not exercise such Option
(which he was entitled to exercise) within the time specified herein, the Option shall terminate. 







 (d) Death of Optionee. In the event of the death of an Optionee: 
  
 (i) during the term of the Option while such Optionee is at
the time of his death an Employee or Consultant of the Company and who shall have been in Continuous Status as an Employee or Consultant since the date of grant of the Option, all unvested options under the Optionee’s Option shall immediately
vest, and the Option may be exercised, at any time within six (6) months (or such other period of time, not exceeding six (6) months, as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made
at the time of grant of the Option) following the date of death (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), by the Optionee’s estate or by a person who acquired the right
to exercise the Option by bequest or inheritance; or 
  
 (ii) within thirty (30) days (or such other period of time not exceeding three (3) months as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option)
after the termination of Continuous Status as an Employee or Consultant, the Option may be exercised, at any time within twelve (12) months following the date of death (but in no event later than the date of expiration of the term of such Option as
set forth in the Option Agreement), by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination.

  
 10. Withholding Taxes. As a condition to the exercise
of Options granted hereunder, the Optionee shall make such arrangements as the Administrator may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with the exercise, receipt
or vesting of such Option. The Company shall not be required to issue any Shares under the Plan until such obligations are satisfied. 
  
 11. Satisfaction of Withholding Tax Obligations. At the discretion of the Administrator, Optionees may satisfy withholding obligations as provided
in this paragraph. When an Optionee incurs tax liability in connection with an Option which tax liability is subject to tax withholding under applicable tax laws, and the Optionee is obligated to pay the Company an amount required to be withheld
under applicable tax laws, the Optionee may satisfy the withholding tax obligation by one or some combination of the following methods: (a) by cash payment, or (b) out of Optionee’s current compensation, (c) if permitted by the Administrator,
in its discretion, by surrendering to the Company Shares that (i) in the case of Shares previously acquired from the Company, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on
the date of surrender equal to or less than Optionee’s marginal tax rate times the ordinary income recognized, or (d) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option that number of Shares having
a Fair Market Value equal to the amount required to be withheld. For this purpose, the Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the “Tax
Date”). 







 All elections by an Optionee to have Shares withheld to satisfy tax withholding obligations shall be made
in writing in a form acceptable to the Administrator. 
  
 12.
Non-Transferability of Options. Unless determined otherwise by the Administrator, an Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or
distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option transferable, such Option shall contain such additional terms and conditions as the Administrator deems appropriate.

  
 13. Adjustments Upon Changes in Capitalization or
Merger. 
  
 (a) Changes in Capitalization. Subject to
any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option, the number of shares of Common Stock that have been authorized for issuance under the Plan but as to which no Options
have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, and the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of
Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such
adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. 
  
 (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Board
shall notify the Optionee as soon as practicable prior to the effective date of such proposed action. To the extent it has not been previously exercised, the Option will terminate immediately prior to the consummation of such proposed action.

  
 (c) Acceleration upon Change in Control. In the event
of a Change in Control of the Company, all outstanding options granted under the Plan shall become vested and immediately and fully exercisable, and may either (i) be assumed or an equivalent option or right shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation or (ii) terminate ten (10) days after the Administrator shall notify the Optionee of such vesting and termination. For the purposes of this paragraph, the Option shall be considered
assumed if, following the merger or sale of assets, the option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock,
cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding Shares); provided, however, 







 that if such consideration received in the merger or sale of assets is not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely
common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 
  
 (d) Certain Distributions. In the event of any distribution to the Company’s stockholders of securities of any
other entity or other assets (other than dividends payable in cash or stock of the Company) without receipt of consideration by the Company, the Administrator may, in its discretion, appropriately adjust the price per share of Common Stock covered
by each outstanding Option to reflect the effect of such distribution. 
  
 14. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to whom an Option is so granted within a reasonable time after the date of such grant. 
  

15. Amendment and Termination of the Plan. 
  
 (a) Amendment and Termination. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable.

  
 (b) Stockholder Approval. The Company shall obtain
stockholder approval of any material Plan amendment (including but not limited to any downward repricing of outstanding options) and to the extent necessary and desirable to comply with Applicable Laws. 
  
 (c) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which
agreement must be in writing and signed by the Optionee and the Company. 
  
 16. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall
comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required
by any of the aforementioned relevant provisions of law. 
  
 17.
Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the 







 requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction,
which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such
requisite authority shall not have been obtained. 
  
 18.
Option Agreement. Options shall be evidenced by written option agreements in such form as the Board shall approve. 
  
 19. Option Grants to Non-Employee Directors. Upon joining the Board of Directors, each non-Employee Director shall receive a one-time grant of an
Option to purchase 30,000 shares (subject to adjustment for splits, recapitalizations and the like) of Common Stock at the Fair Market Value as of the date of grant, vesting ratably over 36 months. Each non-Employee Directors shall be granted an
annual Option to purchase 15,000 shares (subject to adjustment for splits, recapitalizations and the like) of Common Stock at the Fair Market Value as of the date of grant, vesting ratably over 12 months. 







 SALIX PHARMACEUTICALS, LTD. 
 1996 STOCK OPTION PLAN 
 NOTICE OF STOCK OPTION GRANT 
  
 You have been granted an option to purchase Common Stock of Salix
Pharmaceuticals, Ltd. (the “Company”) as follows: 
  

			
	     Date of Grant:
	  	_______________
		
	    Vesting Commencement Date:	  	_______________
		
	    Exercise Price Per Share	  	_______________
		
	    Total Number of Shares Granted:	  	_______________
		
	    Total Exercise Price:	  	_______________
		
	    Type of Option:	  	___ Incentive Stock Option (“ISO”)
		
	 	  	___ Nonstatutory Stock Option (“NSO”)
		
	    Term/Expiration Date:	  	 
		
	    Vesting Schedule:	  	This Option may be exercised, in whole or in part, in accordance with the following schedule: 1/4 of the shares subject to this Option shall vest and become exercisable at the end of a twelve
month anniversary of the vesting commencement date and 1/48th of the shares on each monthly anniversary
thereafter
		
	 	  	___________________________
		
	 	  	___________________________
		
	    Termination Period:	  	Option may be exercised, to the extent vested as of the date of such termination, for 90 days after termination of Continuous Status as an Employee or Consultant except as set forth in
Sections 6 and 7 of the Stock Option Agreement (but in no event later than the Expiration Date).

  
 By your signature and
the signature of the Company’s representative below, you and the Company agree that this option is granted under and governed by the terms and conditions of the 1996 Stock Option Plan and the Stock Option Agreement, all of which are attached
and made a part of this document. 
  

					
	 OPTIONEE:
	 	SALIX PHARMACEUTICALS, LTD.
			
	
	 	 By:
	 	  


			
	
 Print Name
	 	 Title:
	 	  










 SALIX PHARMACEUTICALS, LTD. 
  
 1996 STOCK OPTION PLAN 
 STOCK OPTION AGREEMENT 
  
 1. Grant of Option. Salix Pharmaceuticals, Ltd. a Delaware corporation (the “Company”), hereby grants to the Optionee named in the Notice of Grant (the “Optionee”), an option (the
“Option”) to purchase a total number of shares of Common Stock (the “Shares”) set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the “Exercise
Price”) subject to the terms, definitions and provisions of the Salix Pharmaceuticals, Ltd. 1996 Stock Option Plan (the “Plan”) adopted by the Company, which is incorporated herein by reference. Unless otherwise defined
herein, the terms defined in the Plan shall have the same defined meanings in this Option. 
  
 If designated an Incentive Stock Option, this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. 
  
 2. Exercise of Option. This Option shall be exercisable during its term in accordance with the Vesting Schedule set
out in the Notice of Grant and with the provisions of Section 9 of the Plan as follows: 
  
 (i) Right to Exercise. 
  
 (a) This Option may not be exercised for a fraction of a share. 
  
 (b) In the event of Optionee’s death, disability or other termination of employment or consulting relationship, the exercisability of the Option is governed by Sections 5, 6 and 7 below, subject to the limitation
contained in subsection 2(i)(c). 
  
 (c) In no event may this
Option be exercised after the date of expiration of the term of this Option as set forth in the Notice of Grant. 
  
 (ii) Method of Exercise. This Option shall be exercisable by written notice (in the form attached as Exhibit A) which shall state the
election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder’s investment intent with respect to such shares of Common Stock as may be
required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Chief Financial Officer of the Company. The written notice shall be
accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price. 







 No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise
shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the
date on which the Option is exercised with respect to such Shares. 
  
 3. Method of Payment. Payment of the Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: 
  
 (i) cash; or 
  
 (ii) check; or 
  
 (iii) surrender of other shares of Common Stock of the Company which (A) in the case of Shares acquired pursuant to the exercise of a Company option,
either have been owned by the Optionee for more than six (6) months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (B) have a fair market value on the date of surrender equal to the Exercise Price of the
Shares as to which the Option is being exercised; or 
  
 (iv)
authorization from the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to
which the Option is exercised; or 
  
 (v) delivery of a properly
executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the exercise price, or 
  
 (vi) any combination of the foregoing methods of payment. 
  
 4. Restrictions on Exercise. This Option may not be exercised until such time as the Plan has been approved by the
stockholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation,
including any rule under Part 207 of Title 12 of the Code of Federal Regulations (“Regulation G”)as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make
any representation and warranty to the Company as may be required by any applicable law or regulation. 
  
 5. Termination of Relationship. In the event of termination of Optionee’s Continuous Status as an Employee or Consultant, Optionee may, to the
extent otherwise so entitled at the date of such termination (the “Termination Date”), exercise this Option during the Termination Period set out in the Notice of Grant. To the extent that Optionee was not entitled to exercise this
Option at the date of such termination, or if Optionee does not exercise this Option within the time specified herein, the Option shall terminate. 







 6. Disability of Optionee. Notwithstanding the provisions of Section 5 above, in the event of
termination of Optionee’s Continuous Status as an Employee or Consultant as a result of his or her disability, all unvested options under this Option shall immediately vest, and Optionee may, but only within twelve (12) months from the date of
termination of employment (but in no event later than the date of expiration of the term of this Option as set forth in Section 9 below), exercise this Option. To the extent that Optionee does not exercise such Option within the time specified
herein, the Option shall terminate. 
  
 7. Death of
Optionee. In the event of the death of Optionee: 
  
 (i)
during the term of this Option and while an Employee or Consultant of the Company and having been in Continuous Status as an Employee or Consultant since the date of grant of the Option, all unvested options under this Option shall immediately vest,
and the Option may be exercised at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 9 below), by Optionee’s estate or by a person
who acquired the right to exercise the Option by bequest or inheritance; or 
  
 (ii) within thirty (30) days after the termination of Optionee’s Continuous Status as an Employee or Consultant, the Option may be exercised, at any time within twelve (12) months following the date of death (but
in no event later than the date of expiration of the term of this Option as set forth in Section 9 below), by Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of
the right to exercise that had accrued at the date of termination. 
  
 8. Non-Transferability of Option. This option may not be transferred in any manner and may be exercised during the lifetime of Optionee only by Optionee. The terms of this Option shall be binding upon the executors, administrators,
heirs, successors and assigns of the Optionee. 
  
 9. Term of
Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option. The limitations set out in Section 7 of the Plan
regarding Options designated as Incentive Stock Options and Options granted to more than ten percent (10%) stockholders shall apply to this Option. 
  
 10. Taxation Upon Exercise of Option. Optionee understands that, upon exercising a Nonstatutory Stock Option, he or she will recognize income for
tax purposes in an amount equal to the excess of the then fair market value of the Shares over the exercise price. However, the timing of this income recognition may be deferred for up to six months if Optionee is subject to Section 16 of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). If the Optionee is an employee, the Company will be required to withhold from Optionee’s compensation, or collect from Optionee and pay to the applicable taxing
authorities, an amount equal to a percentage of this compensation income. Additionally, the Optionee may at some point be required to satisfy tax withholding obligations with respect to the disqualifying disposition of an Incentive Stock Option. The
Optionee shall satisfy his or her tax withholding obligation arising upon the exercise of this Option by one or some combination of the following methods: (i) by cash payment, or (ii) out of 







 Optionee’s current compensation, or (iii) if permitted by the Administrator, in its discretion, by surrendering to
the Company Shares which (a) in the case of Shares previously acquired from the Company, have been owned by the Optionee for more than six months on the date of surrender, and (b) have a fair market value on the date of surrender equal to or greater
than Optionee’s marginal tax rate times the ordinary income recognized, or (iv) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option that number of Shares having a fair market value equal to the
amount required to be withheld. For this purpose, the fair market value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the “Tax Date”). 
  
 If the Optionee is subject to Section 16 of the Exchange Act (an
“Insider”), any surrender of previously owned Shares to satisfy tax withholding obligations arising upon exercise of this Option must comply with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act
(“Rule 16b-3”) and shall be subject to such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. 

 
 All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the Administrator and shall be subject to the following restrictions: 
  
 (1) the election must be made on or prior to the applicable Tax Date; 
  
 (2) once made, the election shall be irrevocable as to the particular Shares of the Option as to which the election is made;

  
 (3) all elections shall be subject to the consent or
disapproval of the Administrator; 
  
 (4) if the Optionee is an
Insider, the election must comply with the applicable provisions of Rule 16b-3 and shall be subject to such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act
with respect to Plan transactions. 
  
 11. Tax
Consequences. Set forth below is a brief summary as of the date of this Option of some of the U.S. federal and North Carolina tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND
THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. 
  
 (i) Exercise of ISO. If this Option qualifies as an ISO, there will be no regular U.S. federal income tax liability or North Carolina income tax
liability upon the exercise of the Option, although the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes
and may subject the Optionee to the alternative minimum tax in the year of exercise. 







 (ii) Exercise of Nonstatutory Stock Option. If this Option does not qualify as an ISO, there may
be a regular U.S. federal income tax liability and North Carolina income tax liability upon the exercise of the Option. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess,
if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. If Optionee is an employee, the Company will be required to withhold from Optionee’s compensation or collect from Optionee and pay to the applicable
taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. 
  
 (iii) Disposition of Shares. In the case of an NSO, if Shares are held for at least one year, any gain realized on disposition of the Shares will
be treated as long-term capital gain for U.S. federal and North Carolina income tax purposes. In the case of an ISO, if Shares transferred pursuant to the Option are held for at least one year after exercise and are disposed of at least two years
after the Date of Grant, any gain realized on disposition of the Shares will also be treated as long-term capital gain for U.S. federal and North Carolina income tax purposes. If Shares purchased under an ISO are disposed of within such one-year
period or within two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (1) the
fair market value of the Shares on the date of exercise, or (2) the sale price of the Shares. 
  
 (iv) Notice of Disqualifying Disposition of ISO Shares. If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or
before the later of (1) the date two years after the Date of Grant, or (2) the date one year after the date of exercise, the Optionee shall immediately notify the Company in writing of such disposition. Optionee agrees that Optionee may be subject
to income tax withholding by the Company on the compensation income recognized by the Optionee from the early disposition by payment in cash or out of the current earnings paid to the Optionee. 
  

			
	 Salix Pharmaceuticals, Ltd.

	 a Delaware corporation

		
	 By:
	 	  


	 Title:
	 	  











 OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE OPTION HEREOF IS EARNED ONLY BY CONTINUING
CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY’S
STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE’S RIGHT OR THE
COMPANY’S RIGHT TO TERMINATE OPTIONEE’S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE. 
  
 Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all
provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. 
  
 Dated:
                         
  

	
	

	 Signature of Optionee










 EXHIBIT A 
  
 SALIX PHARMACEUTICALS, LTD. 
 1996 Stock Option Plan 
  
 EXERCISE NOTICE 
  
 Salix Pharmaceuticals, Ltd. 
 8540 Colonnade Center Drive, Suite 501 
 Raleigh, NC 27615 
 Attention: Chief Financial Officer 
  
 1. Exercise of Option. Effective as of today,             ,
    , 20    , the undersigned (“Optionee”) hereby elects to exercise Optionee’s option to purchase shares of the Common Stock (the “Shares”) of Salix
Pharmaceuticals, Ltd. (the “Company”) under and pursuant to the Company’s 1996 Stock Option Plan, as amended (the “Plan”) and the [ ] Incentive [ ] Nonstatutory Stock Option Agreement
dated                     (the “Option Agreement”). 
  
 2. Representations of Optionees. Optionee acknowledges that Optionee has received, read and understood the Plan and
the Option Agreement and agrees to abide by and be bound by their terms and conditions. Optionee represents that Optionee is purchasing the Shares for Optionee’s own account for investment and not with a view to, or for sale in connection with,
a distribution of any of such Shares. 
  
 3. Compliance with
Securities Laws. Optionee understands and acknowledges that the Shares may not have been registered under the Securities Act of 1933, as amended (the “1933 Act”), and, notwithstanding any other provision of the Option Agreement
to the contrary, the exercise of any rights to purchase any Shares is expressly conditioned upon compliance with the 1933 Act, all applicable state securities laws and all applicable requirements of any stock exchange or over the counter market on
which the Company’s Common Stock may be listed or traded at the time of exercise and transfer. Optionee agrees to cooperate with the Company to ensure compliance with such laws. 
  
 4. Federal Restrictions on Transfer. Optionee understands that if the Shares have not been registered under the 1933
Act, they cannot be resold and must be held indefinitely unless they are registered under the 1933 Act or unless an exemption from such registration is available and that the certificate(s) representing the Shares may bear a legend to that effect.
Optionee understands that the Company is under no obligation to register the Shares and that an exemption may not be available or may not permit Optionee to transfer Shares in the amounts or at the times proposed by Optionee. Specifically, Optionee
has been advised that Rule 144 promulgated under the 1933 Act, which permits certain resales of unregistered securities, is not presently available with respect to the Shares and, in any event requires that the Shares be paid for and then be held
for at a specified period before they may be resold under Rule 144. 







 5. Rights as Stockholder. Until the stock certificate evidencing such Shares is issued (as
evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to
the date the stock certificate is issued, except as provided in the Plan. 
  
 6. Tax Consultation. Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee’s purchase or disposition of the Shares. Optionee represents that Optionee has consulted
with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. 
  
 7. Stop-Transfer Orders. 
  
 (a) Stop-Transfer Notices. Optionee agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue
appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. 
  
 (b) Refusal to Transfer. The Company shall not be required (i) to
transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other
transferee to whom such Shares shall have been so transferred. 
  
 8. Successors and Assigns. The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer herein set forth, this Agreement shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns. 
  
 9. Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by Optionee or by
the Company forthwith to the Company’s Board of Directors or the committee thereof that administers the Plan, which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Board or committee shall be final
and binding on the Company and on Optionee. 
  
 10. Governing
Law; Severability. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina excluding that body of law pertaining to conflicts of law. Should any provision of this Agreement be determined by a
court of law to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable. 
  
 11. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or
upon deposit in the United States mail by 







 certified mail, with postage and fees prepaid, addressed to the other party at its address as shown below beneath its
signature, or to such other address as such party may designate in writing from time to time to the other party. 
  
 12. Further Instruments. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement. 
  
 13.
Delivery of Payment. Optionee herewith delivers to the Company the full Exercise Price for the Shares. 
  
 14. Entire Agreement. The Plan and Notice of Grant/Option Agreement are incorporated herein by reference. This Agreement, the Plan and the Notice
of Grant/Option Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and is governed by North Carolina
law except for that body of law pertaining to conflict of laws. 








					
	 Submitted by:
	 	 Accepted by:

		
	 OPTIONEE:
	 	 SALIX PHARMACEUTICALS, LTD.

			
	  

	 	 By:
	 	  


	 Signature
	 	 	 	 
	 	 	 Its:
	 	  


	 Name:

	 	 	 	 
	 	 	 Address:
	 	 8540 Colonnade Center Drive

	 	 	 	 	 Suite 501

	 Address:

	 	 	 	 Raleigh, NC 27615

	 	 	 	 	 Attn: Chief Financial Officer